Ethanol, Congress and tax credits

On Friday, June 16, the Senate voted 73-27 in favor of eliminating the Volumetric Ethanol Excise Tax Credit (VEETC). The bipartisan vote, which reversed a Senate vote taken just two days prior, would discontinue a 45-cent-per-gallon tax incentive that goes to blenders and refiners when blending ethanol into gasoline.

A second VEETC-related amendment – offered by Minnesota Sen. Amy Klobuchar and South Dakota Sen. John Thune – is backed by ethanol proponents. The Klobuchar/Thune bill would allow a “variable VEETC” to function only when oil prices falls below $90 per barrel. This, claim proponents, would mean some $1 billion in savings while providing some $1.5 billion to small producer tax credits.

Shortly after the vote, Delta Farm Press spoke with Chad Hart, Iowa State University assistant professor of economics, about the situation.

Hart, who studies and follows the ethanol industry, spoke on the Senate’s breach of tax legislation protocol, the Klobuchar/Thune alternative and how the House might react. Among his comments:

On the reason members of the House are agitated by the Senate’s VEETC vote…

“Traditionally, any bill that deals with taxes starts in the House.

“When the Senate made this move on the VEETC, it was a tax change and should have started in the House. Procedurally, that’s how Congress goes about it and is why the House is in an uproar.”

On what Coburn was trying to accomplish…

“Coburn wanted to put a marker, if you will, in the sand. He wanted to say ‘we’ll have this vote and show there are enough votes in the Senate to eliminate this tax credit, right now.’

“I think he was thinking ‘we’ll get this vote, and we’ll show the House we’re serious. The House will pick it up and vote on it.’

“It’s true this was a symbolic vote. But it was also a strategic vote. It is now established, by a sizeable majority, that there are enough votes in the Senate to completely get rid of the tax credit.”

On the Klobuchar/Thune alternative and a “variable VEETC”…

“Coburn/Feinstein would completely eliminate the tax credit. Klobuchar/Thune would provide a ‘scalable’ tax credit, based on oil prices.

“Under Klobuchar/Thune, if oil prices are low – a bad situation for the ethanol industry – the tax credit will be viable. If oil prices are high, the tax credit would disappear. The tax credit would only pay out, if you will, when oil prices are low.”

Parties and regions

On how the Senate vote broke down along party and region…

“I think you can take this away from Republican/Democrat. That’s because when you look at how the votes are breaking down, it isn’t along party lines. Instead, it’s breaking down relative to what part of the country you’re from.

“The Senate vote yesterday was 72 to 27 to get rid of the ethanol tax credit. But when you look closer, I believe there were 40 Democrats and 33 Republicans who voted for it. There was a balance.

“What you saw was the East Coast and West Coast voting to eliminate. The upper Midwest voted against it.

“Some of the argument says when you eliminate a tax credit, that’s essentially a tax increase. Well, no Republican wants to admit that – especially with the Tea Party out there. When approaching the deficit, they want spending cuts not tax increases.

“That’s one of the issues Sen. Coburn has been trying to navigate. ‘Yes, we want to eliminate this tax credit’ while others are classifying it as a tax increase.

“So, what should this actually be called? A subsidy? A tax credit?”

On numbers crunching related to ethanol…

“In this country, we produce around 13 billion to 13.5 billion gallons of ethanol in a year that is blended. That means the tax credit is worth about $6 billion.

“Some of that $6 billion shows up as higher corn prices. That’s because in order to create the ethanol you have to bid for corn to put into mash. Estimates on that vary quite a bit.”

“The best estimates I’ve seen show that ethanol’s contribution of food price increases is in the 10 percent range. So, ethanol is a contributing factor but isn’t the major factor.

“When you look at ethanol, it’s mainly hitting the corn market. Well, corn isn’t a food crop directly. The vast majority of the corn produced in the United States isn’t headed directly to the supermarket. It shows up in the supermarket via meat – that’s where the impact is.

“So, corn’s impact on the grocery store bill is indirect and takes time to develop. Realistically, the corn prices we see today don’t hit grocery store prices until six months to one year from now. That’s when the meat from the animals fed the corn shows up in the store.”

How does dried distillers grain (DDGs) figure into that?

“DDGs help reduce the problem. DDGs are another livestock feed source.

“While corn may be pulled from another use into ethanol, you are actually able to recapture some of that corn and feed it into the livestock industry. That keeps prices down.”

On the ethanol infrastructure and impact on jobs if the ethanol tax credit is lost…

“This will probably deviate from what the industry will say.

“I ran the numbers recently and found you could take the tax credit away and the plants would still be running. The blenders would still be using ethanol. There’s enough profit in the system currently to handle the loss of the tax credit.

“I think you’d see a slow-down in the industry but not a shut-down.”

On expectations in the House…

“What I’ve heard out of the House is there isn’t anyone looking to pick this bill up anytime soon. They have bigger fish to fry.

“The Senate had a champion for this amendment. Sen. Coburn was willing to fight to make sure there was a vote.

“I don’t see a champion for this in the House, right now. Maybe one will emerge but it hasn’t happened yet.”

Anything else?

“I’ll relate this to a baseball game. This debate will be going on for the rest of the year. We’re only in the second or third inning. There will be a lot of debate to come on biofuels and ethanol.

“Last year, the ethanol tax credits were extended under the explicit agreement that there would be a full debate on biofuels. I think the actions of this week have shown that debate has started in earnest.”